Question

If a firm needs to keep a minimum cash balance on hand and faces both cash inflows and outflows, which of the cash management models discussed in this chapter would be more appropriate for the firm to use and why?

Answer 1

The Miller & Orr model of cash management. This is a model that has been introduced when the cash inflows & outflows are uncertain. this approach allows the company to set two limits to assist companies with their cash balance the upper & the lower limits in order to determine the return point i.e. target cash balance.

When the cash balances of a company touches the upper limit it purchases a certain number of salable securities that helps them to come back to the desired level. If the cash balance of the company reaches the lower level then the company trades its salable securities and gathers enough cash to fix the problem.